Question

 ​(Bond valuation)  ​Pybus, Inc. is considering issuing bonds that will mature in 15 years with an annual coupon rate of 8 percent. Their par value will be ​$1 comma 000​, and the interest will be paid semiannually. Pybus is hoping to get a AA rating on its bonds​ and, if it​ does, the yield to maturity on similar AA bonds is 11.5 percent. ​ However, Pybus is not sure whether the new bonds will receive a AA rating. If they receive an A​ rating, the yield to maturity on similar A bonds is 12.5 percent. What will be the price of these bonds if they receive either an A or a AA​ rating? a. The price of the Pybus bonds if they receive a AA rating will be ​$ nothing. ​ (Round to the nearest​ cent.)

Answer 1

A

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =15x2

Bond Price =∑ [(8*1000/200)/(1 + 12.5/200)^k]     +   1000/(1 + 12.5/200)^15x2

k=1

Bond Price = 698.4

AA

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =15x2

Bond Price =∑ [(8*1000/200)/(1 + 11.5/200)^k]     +   1000/(1 + 11.5/200)^15x2

k=1

Bond Price = 752.53